This afternoon (3/25/19) CMS released its final report for the 2019 Open Enrollment Period. Approximately 11.4M consumers enrolled in an Exchange plan vs. ~11.8M in 2018 (~2.6% decline) as higher # of automatic re-enrollees (~+500K y/y) partially offset the decline in new consumers (~-500K y/y) and active/unknown re-enrollees (~-300K y/y). See Exhibit 1 on Page 2 for more details. CMS noted that the y/y decline in enrollment could be due to the strong economy and growing employment as well as the new Virginia Medicaid expansion which made previous ~100K exchange members eligible for Medicaid. We note the demographic and plan characteristics for 2019 enrollees were similar to 2018 enrollees.
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In March Individual Med Adv enrollment increased 7.3% y/y and Group Med Adv enrollment increased 8.1% y/y, producing total y/y Med Adv growth of 7.5%. 64.8% of total Med Adv enrollment of 22.3M lives were in our covered companies vs 60.2% of 20.7M lives y/y. Generally, most of our coverage composite is tracking in-line or above their guidance for 2019. See Page 2 for data by plan and email us for our tracking spreadsheet. Additionally we note Humana at its Investor Day today laid out a path to 41-50% MA penetration by 2025 – see slides on page 3.
At recent investor conferences and meetings, MCOs have indicated strong confidence in their ability to navigate the uncertainties that could accompany a potential 2020 start for the HHS rebate proposal and pickup in authorized generic introductions. Specifically on HHS proposal, while MCOs had different views on the right timing of the implementation of the new rebate rule, with HUM/CNC advocating for an early implementation and WCG/CVS preferring a phase-in period (see comments on Page 2), all expressed that they will be well prepared to bid under both scenarios for 2020 Med Adv & Part D. Meanwhile, MCO mgmt teams joined most HC investors in seeing a low likelihood of Medicare-for-All while indicating a strong start to 2019 and solid visibility to 2020 regardless of HIF return and/or rebate rule enaction.
Yesterday (3/5/19), Rep. Cheri Bustos, the chairwoman of the Democratic Congressional Campaign Committee (DCCC) questioned the feasibility of Medicare-For-All in an interview with the Hill stating that it is just one idea and “the $33 trillion price tag for Medicare for all is a little scary”. We doubt anyone finds the comments themselves surprising but given the pressure on MCOs in particular and HC Services in general since Dems introduced legislation that sought to move to single payer in 2 years without any discussion of how to pay for it, we expect there should be some comfort that “universal healthcare tomorrow” is not the party line. Bernie Sander’s version of Medicare-For-All was est. to cost $32T+ over 10 years. We believe that most healthcare investors and ourselves see little chance that this type of legislation becomes more but acknowledge the discussion is likely to continue for at least the next 6-9 months during Democratic primary season / debates with the potential to abate from there once the national election campaign sets in.
LLY announced today (03/04/19) that it will soon launch an authorized generic version of its Humalog insulin, which generated ~$1.8B of net revs in US in 2018. IQVIA data suggests FY18 gross sales of ~$6.3B for Humalog, indicating significant rebates / discounts of ~$4.5B (~70% of gross sales). While price action on a single drug should not have any meaningful impact to earnings, MCOs are trading down today at least partially due to the fear around a potential broad shift in drug pricing trend which can lead to a temporary misalignment between the MCO bids that assume current rebate levels maintain. Recall that we highlighted the concern in our previous slides when we discussed our thoughts on the OptumRx letter to pharma cos requesting 7 quarters of advance notice on list price reductions. We believe the entire system shifting to net pricing is highly unlikely but MCOs could experience some potential interim negative impact from a portion of drugs shifting to net pricing until MCOs can reprice higher to reflect lower rebates collected.
CVS initial guide for 2019 was disappointing across a number of areas, especially retail results including the LTC business deterioration. CVS’s reporting included a lack of full-year 2018 AET results and the guide does not lay out segment specific attribution for items such as synergies and investment spend, leaving a fair amount of confusion as to the core growth of the business. In this note / slides we lay out 2019 moving parts and our updated estimate of 2020 earnings power.
The Louisiana Department of Health (LDH) released its Medicaid Managed Care RFP yesterday (2/25/2019). There are currently 1.5M enrollees statewide, with CNC / UNH / ANTM / CVS-AET from our coverage universe managing significant amounts of enrollment. Most importantly with this new RFP the LDH will currently contract with only up to 4 insurers statewide under the new contract down from the 5 current members of the contract. We note the number of insurers ultimately selected could possibly change between now and before the proposal is due. Proposals are due by April 29th (a relatively quick turnaround of 2 months from announcement date February 25th). The contracts will run from 1/1/20 to 12/31/22, with the LDH having the option to extend the contract for up to 24 additional months. We note that the “LDH will not use a competitive bidding process to develop the MCO capitation rates” – per the LDH rates will be set at an actuarily sound, risk-adjusted rate.
CVS reported Q4 adj EPS of $2.14, which includes 33 days of AET, above WR/Consensus of $2.11/$2.09 – we expect less focus here given AET moving parts but note AET MLR came in better at 80.4% vs. our 83.1% est. Most importantly CVS introduced 2019 EPS guidance of $6.68-$6.88, which was below our expectations of $7.00-$7.20 prior to earnings and meaningfully below Consensus of $7.35. There are significant # of moving parts to the guidance including new headwind of LTC weakness, making the business outlook somewhat difficult to formulate without more color from the conference call but we continue to see focus here on management’s ability to convince investors that this is a conservatively biased view that won’t be missed. In addition, look for color on rebate guarantee impact and break open generics to help understanding earnings trajectory into 2020 and beyond.
We are revising our estimates for CNC / MOH / HUM / WCG post 4Q18 results. We are also updating our price targets across our MCO / Drug Retail coverage universe to reflect 1) our revised earnings estimates laid out in this note and 2) the current S&P 500 market multiple of ~16x NTM earnings (up from previous 15x coming into 2019) given that our valuation methodology is based on relative P/E. See table below, links to all updated models and new PT build-up on page 2 for further details.
Today (2/1/19) after market close, HHS issued a proposed rule (proposed regulation / fact sheet) to eliminate safe harbor protection for drug rebates from manufacturers to PBMs for Part D and Managed Medicaid and replace them w/ discounts provided to beneficiaries at the point of sale. Recall that in July, it was announced the OMB was reviewing a proposed rule submitted by the HHS OIG entitled “Removal Of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection”, which was listed as “economically significant” (see Exhibit 1 in Page 2). HHS is proposing the new rule to be effective on January 1, 2020, which we see nearly zero possibility of executing upon given timelines for bids in Medicare Adv/Part D due in four months.
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